Nifty Future Long-Short Strategy Performance (To know more about it click here)
To answer that, let’s see what is the minimum money you need
to invest.
Let’s take the NIFTY50 Index to be at INR15000.
A standard lot size for the Nifty Future is 75 shares. And
since we need to purchase a minimum of 1 lot, that will cost INR15000*75 = INR11,25,000!
But we don’t need 11.25 lakh to purchase one lot. As you are
aware we use a 3x leverage to run the Nifty Long-Short product. We are buying
11,25,000 worth of Index but we need only 1125000/3=3,75,000. Out of this 3.75
lakh, 1.7 lakh is sourced from the pledged securities and the rest of 2.05
lakh is the cash component.
Now, we will understand the two components of the overall
3.75 lakh capital.
Nifty Long-Short has two components
- Nifty Future
- Cash
Nifty Future Component:-
Let’s take the NIFTY50 Index to be 15000.
First, we start with the ‘Future’ component. A standard lot
size for the Nifty Future is 75 shares. That means we need to purchase a
minimum of 1 lot = 15000*75=Rs. 11,25,000!
Luckily, to buy that amount of Index Futures we don’t have
to pay the whole amount. We have to pay the margin amount, which is approx. 16%
of the contract value, which is 11.25 lakh.
We only have to put a margin (Security) of Around 1,70,000
with the Exchange. And that security can be in the form of cash, shares, bonds
or SGBs.
Cash Component:-
Now, you might have wondered why we need cash with us when
we have Margin (Security) with us. So, to make it clear we will understand the
concept of MTM (Mark to Market).
Let’s say you buy the Index future at 15000. The very next
day Index came down to 14900. You have lost 100 points on the Index. The
exchange will deduct 100*75=7500 from your cash component on the same night.
Now, if the Index rises to 15100 from 14900 the next day, then you will receive
200*75=15000 an account on the same night. So, MTM is Exchange settled
day-to-day profit or loss in your account.
Cash Usage:-
Out of the 2.05 lakh cash, we don’t have to put everything
at once. Below are the three scenarios of how much cash is required in case of a
drawdown.
50% of the Drawdown required cash of around 187500 out of
205000, and the rest of the cash is idle. We don’t need it at once.
|
Initial Capital |
Drawdown % |
Cash Required |
|
375000 |
50% |
187500 |
|
375000 |
40% |
150000 |
|
375000 |
30% |
112500 |
Let’s assume the worst case that we invest at the peak, and lose money thereafter. That would mean you didn’t have any profits and you lose money from the start. This is how drawdown is calculated. Our model has, in the past not shown a drawdown of more than 40%, so these figures are the worst-case scenario.
Effective Return Calculation
We calculate overall profit and loss on total capital of
3.75 lakh.
We need the capital of 3.75 lakh to run 1 Nifty lot but
effectively we need only 1.87 lakh as a capital. That capital is not
required at one go like the cash segment. So, our actual effective return will
be much higher compared to the actual one.
|
Return on Overall Capital |
Effective Return on Your Capital |
|
50% |
100.00% |
|
40% |
80.00% |
|
30% |
60.00% |
|
20% |
40.00% |
|
10% |
20.00% |
|
-10% |
-20.00% |
|
-20% |
-40.00% |
|
-30% |
-60.00% |
How does a security pledge work?
Let’s say you have invested 2 lakhs in a Money Market Fund,
which yields 5.5% of the interest in a year. If you pledge that security then
you will get 90% of the amount as a margin. That turns out to be 1.8 Lakh
(2,00,000*90%). You will get a yearly return of 5.5% on your investment as well
as you can use it for margin.
- SGB – 90% of the Value as a margin
- Money Market Fund - 90% of the Value as a margin
- Liquid bees - 90% of the Value as a margin
- Equity Mutual Fund – 50% of the Value as a margin
